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May 28, 2010

Giving customers control

The 23rd Cards and Payments Europe conference and awards, organised by Cards International and VRL, brought together an array of industry experts to debate the pressing issues facing Europes cards industry, with a special focus on innovation as well as some valuable lessons learned from a tough few years.

By Verdict Staff

The 23rd Cards and Payments Europe conference and awards, organised by Cards International and VRL, brought together an array of industry experts to debate the pressing issues facing Europe’s cards industry, with a special focus on innovation as well as some valuable lessons learned from a tough few years.


Players from a wide range of industries and markets converged on Madrid to offer their opinions on cards, payments and what to look for in the future.

Discussions this year revolved around the future of the industry and the direction it looks to be heading in, especially when certain technologies like prepaid and mobile payments really start to gather pace. As well as excitement over the possibilities presented, there were also several presentations that covered the current market and perhaps how that differed from what was expected this time last year.

A cash-free environment is always going to be an ideal that those in the payments industry will strive for. The introduction of prepaid and mobile has supposedly been a major boon to this aim, but Luke Olbrich, head of debit in Europe at MasterCard Worldwide, explained that while this is certainly a goal worth aiming for, we are perhaps not as close as is thought.

“Our strategy at MasterCard and in debit in particular is to aim for a cash-free day, while making debit simpler,” he said.

“The economic crisis and the advent of SEPA have resulted in significant changes within the payments industry. If you look at both of these, they have changed both consumer behaviour and bank behaviour.

“Broadly what we have found, post economic crisis, is that consumers’ needs have changed significantly. While previously they were looking for status, rewards, enjoyment, personalisation, and flexibility some of those things have falling away and now there’s much more of a focus on personalisation, being smart with your money and control. Control is one of the key words that comes out from consumers right now, in terms of being able to control their spending, budget and so on.”


The SEPA effect

Olbrich also spoke about how SEPA has changed the payments market in Europe, but not quite the way it was initially intended to, converting banks individually rather than en masse as a market.

“I don’t think people really understood what SEPA for cards was going to be like. I think there was some expectation that by the end of 2010 the market would just suddenly change and there would be this revolution. The reality is that the market has evolved. National schemes continue to be in place and will most likely be in place for the foreseeable future, with international schemes like Maestro and MasterCard co-residing alongside the Girocards, the Lasers and so on,” he said.

“What has changed is that individual banks are migrating of their own accord, so while whole markets might not be choosing one direction or another, individual banks are migrating cards to SEPA-wide solutions.

“Also, and this is where we are seeing the most movement, co-branded cards. What this also means is that now we have acquirers from anywhere routing under one international scheme, rather than before 2008 when they were required to route under the national scheme and national processor, so as a result we’ve seen an increase in competition at the acquiring level and greater choice for retailers and for issuing banks.”

Pullquote by Luke Olbrich, MasterCardAs the different types of payment method start to equilibrate there is a lot that needs to be done and can be done to reduce the amount of cash in circulation, in Europe especially. Olbrich thinks a lot of this is down to a lack of education for cardholders and a reluctance to change on the part of retailers and issuers.

“If you look at the growth rates on debit versus cash and electronic payments things are pretty much flattening out. While there has been improvement and right now if you look, cash is about 40% of the total value of transactions in Europe, you could argue that it is beginning to flatten. And I would say that that is for a lack of innovation in debit, in particular here in Europe,” he said.

“If you look at compounded growth on the physical money supply, it’s been at 19% in the eurozone, that’s more than double the US, and at a growth rate of a GDP of only about 3.5%, so in other words we are actually becoming cash heavier here in the euro zone.

“As well as this, e-purses, Proton in Belgium and Cash in Switzerland both recently announced they would cease to exist so the terminals that today take these electronic purses will be removed and those shops will go back to cash. We need to be vigilant and avoid situations like this where we are moving in the wrong direction.”


Security still a concern

Cash is king, Olbrich said, because consumers, retailers and issuers all have their own barriers, their own needs and reasons why they choose and prefer cash over electronic payments.

For consumers it comes down to several factors including acceptance, and a fear of losing control of their spend. In particular in Germany, he added, MasterCard found that users wouldn’t even pay with a debit card because they were afraid they would spend more than they had, and of course there is still concern about fraud.

“While we may as an industry think that by putting in safeguards like EMV and other security measures we are changing the landscape and eliminating fraud, consumers today think that their debit card is less secure than it was five years ago. Thanks to card-not-present fraud, identity theft and the coverage of security breaches by the media there is a real concern by the consumer that they are less safe now, not more, which they are more likely to leave debit cards in their wallet. Strangely enough though, when we spoke to consumers they were not worried about their credit card, because it was the bank’s money,” Olbrich said.

“From the point of view of retailers, there’s no transparency. They don’t see the cost of cash, and the cost of cash here in Europe is extremely distorted. They see cash as free, while with electronic payments they get a bill every month from their provider telling them exactly how much they’ve paid to use this service, so there is a real job there to ensure a cost of cash and a transparency around it. On top of this there is also the perception that card transactions are slow.

“Finally for issuers the cash habits are hard to change. To make the consumer change is actually very expensive. It’s requires spending on advertising and on marketing, as well as this there is the free cash trap: cash has been offered for free for so long its virtually impossible to go back on that and the investments required.”


Searching for profit

As banks and issuers attempted to reduce risk and so turned inward after the crisis of the last few years they started to examine their current card portfolios and perhaps explore some of the possibilities for profits within their existing customers.

Enrique Barthe, business development and innovation director of the BBVA cards business, explained how BBVA started to examine their customer base, and why he decided to reverse a trend within the bank to release new products every month to increase market share.

“When we looked at our customer base from a banking perspective we saw that one of the biggest ways in which we could grow would involve changing the culture among our own customer base,” he said.

“So what we asked ourselves was: ‘What should our card offering and value proposition be given the economic situation? Do we need to continue launching a new product every month? Is this really what our customers are looking for? If not, what are they requesting?’ For the first time we decided that instead of launching a new credit card with some new feature we would ask our customers what they wanted. Maybe they wanted something simpler.”

BBVA estimates 53% of its cardholders are active accounts, and internal research showed 75% of these active cardholders only had one type of card in their pocket.

“Among the group that only had one card, 40% had a debit card – and that’s because they didn’t choose the card,” said Barthe.

“They went to the branch, opened the account and received a card without asking for it. If we look at card spend proportions in our active cardholders we find out that a customer with a revolving card spends less than one with a debit card, who in turn spends less than one with more than one type of card.”

Banks, and card units within them, are always looking for alternate revenue streams, especially as it becomes harder and harder to capture new customers as confidence in the banks remains low.

Barthe thinks this has led to a major change in the way these units view their revenue structures and so innovation has become a key part in card income:

“One of the most important subjects at the moment is that the revenue structure from an issuer perspective is really changing. Since 2005 in Spain, when interchange income came down, it meant that we now have to rely on several things. We have to rely on how much the customer is willing to pay for his card, so the yearly fee, although that will depend on what the competition is like.

“For instance if the competition are pricing cards at €30 [$37] I cannot put the same card out at €60. We need to educate our customers to use revolving cards and so to generate financial interest with their cards. This is something that is still picking up in the Spanish market.

“Cash represents about 58% of all transactions in Spain while card usage is nearly at 20%. If we look at how cards should and can be used we can see great opportunities upcoming in the next few years. These opportunities will not come by putting more cards in customers pockets; they will come when we instruct our users in how to use the cards they already have and the benefits linked to card usage instead of cash or other types of payment. For that we need to really understand what our customers want.

Barthe said that issuers need to try and move customers from managing their risk through debit to deferred debit and to revolving card, where companies are able to get additional income from revolving interest.

“Unfortunately the problem with annual fees is that customers are very reluctant to pay it anymore, so we also have to look to other sources of income – like usage commissions and then perhaps even introduce new products for new segments, like prepaid,” he added.

“It’s not about selling the card and forgetting about the customer anymore, and ignoring how they are using the card when they have the card. We have to educate them and we have to tell them how it can be used and what benefits they can get from using the card. Obviously risk management, and there are new entrants like telcos coming into the payments arena, or PayPal. We really believe the payments industry in 5 to 10 years really isn’t going to look like it does at the moment.”

Table showing Western European payment transactions –percentage share

Chart showing share of Eurozone transactions – card spending as percentage of total transactions

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